There is an extreme to all of this, as in this image you can almost perfectly blend in the advertisement to a menu. I have heard varying reports as to whether or not the networks allow it, and in fact I think if you asked two employees of one network they'd likely give you two different answers. I think the main issue in the above image is likely the "Ads by Google" you can blend the ad text in all you want, but I think the "Ads by" text the networks want to stand out.
Another similar issue is the placing of related or unrelated images next to the ads or above the ads so that it seems like they're icons for the ads. I've heard varying reports where some people are told this is okay, and others not. One thing I can say for certain is that Google is experimenting with doing this themselves.
Both of these options can drastically increase your CTR, but some people have claimed to be banned for using them. So I recommend asking permission directly from Yahoo or Google first before implementing these optimizations. That way you know you got permission and are in the right.
Google has two features Yahoo does not yet have, hints and section targeting.
Section targeting allows you to help point the Adsense bot to your actually content rather than extraneous page information such as navigation or technical details. For instance in a forum your actual page content you want the Adsense bot to generate ads off of is the threads and posts, not all the forum navigation and user information.
You can find out how to implement section targeting here.
Google hints is an unpublished feature that allows you to submit keyword hints to the Adsense bot. This is very useful if you have a keen understanding of your visitors. As I discussed here, targeting your ads to your visitor's desires rather than your content creates a better experience for everyone so if you know your visitor's desires you can use Google hints to tell Google them. Simply add google_hints = "keyword1, keyword2, keyword3, etc"; to the middle of your ad code. However please note that you need permission from Google to make use of this feature.
I have poured practically all my Adsense & YPN optimization knowledge into this article, but it might not all work for you. The most important tip I can give you is to use tracking channels and experiment with the placement on your site. You could be leaving money on the table. Take it from me, I've left thousands of dollars on the table by not doing this, that is money I'd very much like to have.
If you need help with any of the integrations or optimizations mentioned in this article, please visit our forums. Members are standing by to assist you.